Restrictive covenants in the insurance sector
Mohammed Hussain and Caitlin Griffin explore the use, purpose and enforceability of restrictive covenants.
Restrictive covenants are contractual clauses that place certain limitations on what an employee can do once they leave a company. This can include non-compete clauses, non-solicitation clauses and confidentiality clauses.
In the insurance sector, restrictive covenants are essential to safeguard a company's client base and prevent employees from poaching clients or using confidential information to compete with their former employer. Insurers protect their competitive edge from exploitation by maintaining exclusivity over unique procedures, pricing models and consumer data. By protecting against unfair competition and the unauthorised transmission of crucial tactics, such steps guarantee the company's established reputation will stay untarnished. Insurance businesses strengthen their position through restrictive covenants, promoting confidence among clients and business partners while maintaining their market dominance and sector influence.
An example of how restrictive covenants are used in the insurance sector is through the inclusion of non-compete clauses in employment contracts. These clauses are intended to restrict employees, for a time period, from joining a rival company after leaving their current job or approaching former clients. This is important in the insurance sector, as employees may have access to confidential information about clients and policies that they could use to benefit their new employer. Non-compete clauses prevent former employees competing against the legitimate business interests of their former employers.
In the case of Romero Insurance Brokers Ltd v Templeton [2013] EWHC 1198 (QB), the High Court upheld the enforceability of a 12-month non-solicitation restrictive covenant. Mr Templeton joined Romero with his role consisting of managing the Halifax office. Romero was unhappy with Mr Templeton’s performance and the financial position of the business. They subsequently decided that they no longer needed a manager in the Halifax office and pursued a consultation process with Mr Templeton. He was requested not to contact his clients. After two months, Romero terminated Mr Templeton’s employment. However, after his termination, he joined Eastwood Insurance Brokers and began soliciting clients from Romero. Romero sought an injunction for the remainder of the 12-month period, preventing Mr Templeton from further soliciting clients. The High Court, in reaching a decision, stated that: (i) it was industry standard for a non-solicitation covenant to be 12 months, as seen from Mr Templeton’s previous and recent employment contract with Eastwood; and (ii) as insurance policies lasted 12 months, it was conceivable that the covenant should also last as long.
But have there been any recent developments as to restrictive covenants, more broadly, in other regulated professions?
In Boydell v NZP Ltd & Anor [2023] EWCA Civ 373, Dr Boydell breached a restrictive covenant by joining NZP’s direct competitor that also specialised in producing bile acid derivatives. NZP sought an injunction, successfully in the High Court, as Dr Boydell’s activities post-termination would have directly competed with NZP and its ‘group companies’. The Court of Appeal rejected Dr Boydell’s arguments that: (i) without removing reference to ‘group companies’, by way of severance of the non-compete clause, he would be unable to work in the pharmaceutical industry; and (b) the wording of the non-compete clause was too wide. The Court of Appeal upheld the High Court’s decision, averring that the restrictive covenant was reasonable and necessary to protect NZP’s interests.
The absence of restrictive covenants in the insurance industry would have extensive consequences with implications for competitiveness, client relationships and overall market stability. These covenants act as vital safety nets, restricting staff mobility that can lead to the loss of confidential information, customer connections and competitive advantages. Without these legal protections, departing workers would be free to divulge confidential information, endangering the distinctiveness of underwriting procedures, pricing schemes, and risk assessment methodology. Additionally, the absence of limits would allow ex-employees to poach customers and policyholders, eroding trust and possibly harming insurance businesses' reputations. In the absence of safeguards, a climate of unfair competition might be fostered, where departing employees might use their expertise against their former employers. As a result, the competitive equilibrium, client trust, and industry innovation would all be threatened. Restrictive covenants are crucial in this situation for maintaining the stability, security and integrity of the insurance industry.
Without these legal safeguards in contracts, it would be difficult for insurance companies to ensure that their legitimate business interests and long-term relationships with clients are safeguarded.
Mohammed Hussain is a paralegal and Caitlin Griffin is a trainee solicitor at Elborne Mitchell LLP
